IRS Grants Temporary Relaxation of Crypto Tax Reporting Rules Amid Legal Challenges

The Internal Revenue Service (IRS) issued temporary relaxation of crypto cost basis reporting rules, potentially averting increased tax liability for investors in digital assets.

The decision reflects the agency’s recognition of the complexity of crypto taxation and the need for regulatory adaptability in response to market developments.

Tax reliefs

The relaxation postpones the implementation of a rule that would have mandated centralized crypto exchanges to default to the First In, First Out (FIFO) accounting method for capital gains calculations. FIFO typically assumes that the oldest assets are sold first, which often leads to higher taxable gains during market upswings.

This extension will remain in place until December 31, 2025, giving brokers additional time to accommodate different accounting methods.

Investor concerns centered on the potential for inflated tax bills, as FIFO could force the sale of assets purchased at lower prices, boosting profits. Shehan Chandrasekera, Cointracker’s head of taxation, warned that the immediate application of FIFO could disproportionately affect crypto taxpayers, potentially triggering significant tax burdens.

During the exemption period, taxpayers can choose accounting methods such as Highest In, First Out (HIFO) or Specific Identification (Spec ID). These alternatives allow investors to select assets to sell, providing flexibility and potentially mitigating tax exposure.

Legal challenges

The IRS’s announcement coincides with increased legal and industry scrutiny over the agency’s changing approach to taxing digital assets. On December 28, the Blockchain Association and the Texas Blockchain Council filed a lawsuit challenging the IRS’ expanded reporting requirements.

The lawsuit challenges brokers’ mandate to report all digital asset transactions, including those conducted on decentralized exchanges (DEXs), arguing that the rules exceed constitutional limits.

Critics of the IRS’ expanded rules argue that they exceed the agency’s authority and impose undue burdens on market participants. Under the expanded framework, scheduled to take effect in 2027, brokers will be required to report taxpayer information and disclose gross proceeds from crypto transactions.

The temporary relief highlights the IRS’s recognition of the volatile nature of crypto markets and the diverse strategies of investors. Observers see the decision as a necessary step toward balancing regulatory oversight with the operational realities of the crypto industry.

Market participants largely see the delay as a constructive development, allowing more time for industry adjustment and compliance.